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Nautilus Insurance Co. v. Lexington Insurance Co.

Supreme Court of Hawaii

February 13, 2014

NAUTILUS INSURANCE COMPANY, Plaintiff-Appellant,
v.
LEXINGTON INSURANCE COMPANY, DOE DEFENDANTS 1-10, Defendants-Appellees.

ORIGINAL PROCEEDING

Roy F. Hughes and Charlene Tran Murata, for plaintiff-appellant

Randall Y. Yamamoto and Christine E. Savage, for defendant-appellee

RECKTENWALD, C.J., NAKAYAMA, ACOBA, McKENNA, AND POLLACK, JJ.

OPINION

ACOBA, J.

The United States Court of Appeals for the Ninth Circuit (Ninth Circuit) certified the following questions of law to this court:

1. Whether an insurer may look to another insurer's policy in order to disclaim the duty to defend, where the complaint in the underlying lawsuit alleges facts within coverage.
2. Whether an "other insurance" clause that purports to release an otherwise primary insurer of the duty to defend if the insurer becomes excess as to liability is enforceable.
3. Whether the irreconcilability of "other insurance" provisions in otherwise primary insurance policies should be determined before or after the operation of the "other insurance" provisions is determined.
4. Whether, and when, an excess insurer, or an otherwise primary insurer who becomes an excess insurer by operation of an "other insurance" clause, has a duty to defend.

I.

A.

VP & PK (ML) LLC (VP & PK) is the owner and developer of a tract of land in the Maui Lani Project District. VP & PK purchased a Commercial General Liability insurance policy[1] for its work on the Maui Lani site from Defendant-Appellee Lexington Insurance Company (Lexington). The policy's Occurrence Form included the following "Other Insurance" provision:

4 . Other Insurance
If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Policy, our obligations are limited as follows:
a. Primary Insurance
This insurance is primary except when b. Excess Insurance, below, applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in c. Method of Sharing, below.
b. Excess Insurance
This insurance is excess over:
(2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations of the "products-completed operations" hazard for which you have been added as an additional insured by attachment of an endorsement.
When this insurance is excess, we will have no duty under Coverages A or B to defend the insured against any "suit" if any other insurer has a duty to defend the insured against that "suit". If no other insurer defends, we will undertake to do so, but we will be entitled to the insured's rights against all those other insurers .
c. Method of sharing
If all of the other insurance permits contribution by equal shares, we will follow this method also. Under this approach each insurer contributes an equal amount until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.
If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. Under this method, each insurer's share is based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.

(Emphases added.) Lexington did not include Kila Kila Construction (Kila Kila) as an additional insured.

Kila Kila was one of VP & PK's subcontractors for the Maui Lani development. Kila Kila purchased a Commercial General Liability Coverage insurance policy for its work on the Maui Lani site from Plaintiff-Appellant Nautilus Insurance Company (Nautilus). The Commercial General Liability Coverage form contained an "Other Insurance" provision, which stated as follows:

4 . Other Insurance
If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows: a. Primary Insurance
This insurance is primary except when b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in c. below.
b. Excess Insurance
This insurance is excess over:
(2) Any other primary insurance available to you covering liability arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement.

(Emphases added.) Nautilus's policy also contained an "Additional Insured Endorsement" modifying the Commercial General Liability Coverage and adding VP & PK as an additional insured:

SECTION II - WHO IS AN INSURED is amended to include as an insured the person or organization shown in the Schedule below, but only for liability arising out of your negligence and only for occurrences or coverage not otherwise excluded in the policy to which this endorsement applies.
SCHEDULE
Name of Person or Organization:
VP & PK (ML) LLC and Central Pacific Bank 98-880 Iwaena St Aiea, HI 96701
Project: The Fairways at Maui Lani Cost $1.7 Million

(Emphases added.)

Both parties' General Commercial Liability policies include duties to both defend and indemnify.

B.

On June 3, 2008, Karen Goo and a number of Maui residents sued VP & PK, Kila Kila, and other VP & PK subcontractors for damages resulting from construction in Maui Lani. The complaint alleged facts falling within the coverage of both policies. Nautilus funded the defense of both Kila Kila and VP & PK during the entirety of the Goo lawsuit. Ultimately, VP & PK was found solely liable on some claims and ordered to pay damages totaling $232, 700. Kila Kila was not found liable on any claims.

C.

Lexington acknowledged that it would indemnify VP & PK for the jury verdict, and satisfied the entirety of the judgment against VP & PK. It does not appear to dispute its obligation to pay the full amount of damages. However, Lexington denies any obligation to contribute to Nautilus's costs in funding the defense.

D.

On September 14, 2009, Nautilus filed a Complaint in the Hawai'i Circuit Court of the Second Circuit, seeking, inter alia, a declaration that Lexington owed VP & PK a duty to defend and that it breached that duty, and (2) equitable contribution from Lexington for defense costs. On November 10, 2009, Lexington removed the case to the District Court, [2] pursuant to 28 U.S.C. 1332(a)(1).[3] On November 17, 2010, the District Court granted summary judgment to Lexington on all of Nautilus's claims.

The District Court found that (1) Lexington was permitted to look beyond the face of the complaint and its policy -- and, specifically, to Nautilus's policy -- to determine whether it had a duty to defend; (2) Lexington's policy was in excess to Nautilus's policy; (3) as a result, Lexington's duty to defend had never been triggered; and (4) Nautilus was entitled to neither a declaratory judgment nor any contribution for the defense costs. Nautilus Ins. Co. v. Lexington Ins. Co., Cv. No. 90-00537 DAE-LEK, 2010 WL 4812742, at *12-16 (D. Haw. Nov. 17, 2010).

Nautilus appealed to the Ninth Circuit on December 14, 2010, and on October 9, 2012, the Ninth Circuit sua sponte requested that the parties file supplemental briefing addressing whether questions in the case should be certified to this court, and inviting them to comment on four proposed questions for certification. Neither party objected to certification in their briefs, and both concede that Hawai'i law governs this controversy.

On November 2, 2012, the Ninth Circuit filed a request with this court to answer four certified questions. Hawai'i Rules of Appellate Procedure Rule 13(a) provides that "[w]hen a federal district or appellate court certifies to the Hawai'i Supreme Court that there is involved in any proceeding before it a question concerning the law of Hawai'i that is determinative of the cause and that there is no clear controlling precedent in the Hawai'i judicial decisions, the Hawai'i Supreme Court may answer the certified question by written opinion." On January 10, 2013, this court accepted the certified questions. Nautilus filed its Opening Brief on August 5, 2013, Lexington filed its Answering Brief on September 12, 2013, and Nautilus filed a Reply Brief on September 26, 2013.

II.

Question 1: Whether an insurer may look to another insurer's policy in order to disclaim the duty to defend, where the complaint in the underlying lawsuit ...


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